Home Health & Hospice Week

In its bankruptcy filings (No. 4-40416), Intrepid charges that DVI defaulted on its financing agreement when it began to have widely reported financial trouble in the summer of 2003 (see Eli's HCW, Vol. XII, No. 25). The financing shortfall was especially critical when Intrepid purchased 102-office chain MedShares Inc. out of bankruptcy last July.

After pledging $22 million for the purchase, DVI failed to come through with $11 million of it, Intrepid charges. "But for some last minute amendments worked out with [the Centers for Medicare & Medicaid Services]," Intrepid would have lost its $17 million investment in the MedShares acquisition so far, the company contends.

DVI failed to come through on some of its daily financing as well, Intrepid alleges. Due to the financing shortfalls, Intrepid has been managing its operations on a cash receipt basis for the last six months, it says. When Intrepid sought alternate financing, potential lenders said they wouldn't commit until the DVI obligation was resolved, Intrepid spokesperson Austin says.

After unsuccessful mediation, Intrepid filed bankruptcy, the court filings say. "In shorthand, Intrepid was trying to get rid of DVI," Austin tells Eli.

DVI Attempts a Coup

But right before the bankruptcy filing, DVI declared Intrepid and Garamella in violation of their contractual obligations with the financier. And specifically, Garamella had signed a stock pledge agreement forfeiting his privately held stock - 100 percent of Intrepid USA and 90 percent of its related organizations - to DVI, according to the financier's filings.

DVI says because Intrepid violated the lending agreement, it declared Garamella off the Board of Directors and installed its own representative as the sole director. The new "Board" then relieved Garamella of his authority in the company.

Thus, Garamella had no authority to put the company into bankruptcy and the court should dismiss the case, DVI argues.

After the attempted coup, DVI sent consultants to Intrepid headquarters to "take over and assume control," Intrepid says.

Intrepid argues that DVI defaulted on its financing agreement first, and thus was in no legal position to declare the contract breached.

Whether the bankruptcy court agrees remains to be seen, and the evidentiary hearing set for March 31 is likely to be just the opening round in a long fight, observers expect.

Will the Court Favor the Provider?

The main arguments as well as many smaller charges and cross-charges are making this case "very messy," Flanagan says. And experts decline to predict an outcome for such a complicated suit. But a few early indications could point in Intrepid's favor.

In addition to the court's refusal to grant DVI an expedited hearing, Intrepid's status as a Medicare provider in charge of the care of thousands of patients daily could work for the company, Flanagan suspects. "There are 125,000 patients at risk" if the company is pulled out of bankruptcy and goes belly up, he points out. That's bound to weigh in the court's decision.

On the other hand, the courts have not historically proven sympathetic to this attribute, maintains Burtonsville, MD-based attorney Elizabeth Hogue. "I have seen a disturbing lack of attention by bankruptcy courts to the fact that care to patients must be maintained at all costs," Hogue notes.

Another potential benefit for Intrepid is the fact that receivables are not eligible for sale under Medicare regulations, which may limit DVI's authority, Zink-Pearson says.

Finally, DVI's "air of desperation," including the dramatics of ousting Garamella and attempting a physical takeover, may work against the financier, Flanagan says.

"It is unusual for a lender to want to jump in and take over" a health care provider, Flanagan believes. A direct takeover involves a fair amount of risks and liabilities as a provider.

The fact that DVI wants to pull Intrepid out of bankruptcy for "murky objectives" may not sit well with the court, Flanagan predicts.

DVI did not respond to requests for comment for this story.

More Revelations Forthcoming

Don't expect these filings to be the last of the companies' dirty laundry aired, Flanagan says. As DVI and Intrepid start "knocking heads" in upcoming hearings, more sensitive facts are sure to spill out. "Expect an animated hearing," he advises.